August 6, 2010

Can credit union directors add value? Should they even try? How can value be added? How can value addition be measured?

Sound familiar?

These are some of the questions directors are often asked to consider during the annual board assessment process.

Unlike the corporate sector there is no firm market test such as share value to measure performance.

The use of balanced scorecards broadens the range of performance indicators that might be used to measure board effectiveness, but a greater number of indicators can sometimes create confusion and contention. As an example, directors who believe they are elected to fill an advocacy role on behalf of members may soon find themselves at loggerheads with regulators who believe stewardship should be paramount.

The key to being an effective director – one who truly adds value – begins with an understanding of the role and responsibilities of directorship. Directors must have an idea of the complex, difficult decisions likely to be faced and a plan to address them when they arise. This provides the basis for sound progressive decision making, which in the final analysis is what being an effective director is all about.

The following list of issues provides examples of some of the important questions directors must answer in building effectiveness. They’re gathered from our client files covering a broad range of board assessments.

Consider the Question: To Whom is Loyalty Owed?

As a director, loyalty is owed to the credit union first and foremost, as opposed to any specific groups of shareholders or stakeholders. Aside from meeting the requirements of legislation in which directors are obliged to ensure their decisions benefit the entity, it adds clarity when the focus of decision making is the well-being of the credit union as a whole, rather than disparate interest groups. Naturally directors can have differing points of view as to how to best serve the needs of the credit union, but there are important benefits gained by having those discussions.

What is Governance?

The Organisation for Economic Cooperation and Development (http://www.oecd.org ) defines governance as the “system” through which organizations are directed and controlled. Directors must therefore provide direction and ensure accountability is established to see the direction through. The buck stops with the board. Although directors delegate management and leadership to the CEO, they may not abrogate their responsibility to ensure they have provided clear direction as to their expectations and that they’ve been clear in identifying the outcomes that should flow from that.

The board has every right to seek counsel from the CEO and certainly must not interfere in management once delegated. But the board must help the CEO by ensuring he or she is clear as to the direction and expected results.

In the final analysis, the work of the board differs from the work of management. Whereas management must be given latitude to lead the organization, so too must the board to do its job in ensuring the governance process is both effective and complete.

Dealing With the CEO

CEOs have high expectations placed on them and they must be given the authority and latitude to meet them, but they are also entitled to know where they stand.

Annual performance assessments of the CEO are critically important, but can be one of the most uncomfortable issues directors will face. Directors often struggle with the assessment process because they feel they don’t fully understand the intricacies of the CEO’s role. There may also be a level of trepidation in assessing the performance of a person with whom they have worked closely. Neither of these should detract from addressing the assessment process head on.

The board has the capacity to engage consultants to assist in the CEO assessment process. Given the importance of providing the CEO with a fully considered assessment, external advisors can be very effective.

It’s important that directors realize credit unions are dynamic entities. It’s entirely possible, as an example, that a CEO who proved so capable at business reorganization may not be the best candidate to lead the organization through a strong expansion.

Independence

Directors must maintain their independence, and remain independently minded at all times. One good test of independent mindedness is the desire to ask questions. Questions will invariably arise as a result of reviewing the board package, but it’s the preparedness to ask questions that probe sensitive issues, clarify understanding and ensure items left for follow-up have been properly pursued that adds the greatest value.

The board should meet in camera (in private) at each regular meeting to discuss a range of issues, such as the quality of the board meeting agenda, the degree to which its direction is being followed, board effectiveness and emerging issues. Time should also be devoted to meeting with auditors and regulators in a private setting.

Strategy Setting

Boards are required to review, understand, question, amend and eventually adopt management’s proposed strategic plan. When reviewing the plan it’s important to ask and understand which alternatives management considered and why they were not pursued.

It’s also important to be clear on how progress against the plan should be measured.

When monitoring the plan throughout the year, a good deal of attention must be paid to assessing any slippages. These could be critical early warning indicators that the strategy is mistimed or becoming increasingly ineffective. It’s useful to establish a range of tolerances that if reached would signal the need to revisit the strategic plan.

Risk

The board is responsible for evaluating and monitoring principal business risks. Risk reporting to the board is usually done once a year, but it’s useful to consider a discussion on risk each time the board meets.

At least once a year, the board should review the credit union’s risk position and reconsider both the appetite for risk and the level of risk tolerance. Independent risk assessments are useful for those organizations that have not appointed a chief risk officer.

When establishing the level of risk tolerance, it’s important to quantify all major risk indicators and to set tolerance thresholds to signify when risks are increasing beyond expectation. Loan delinquency, pricing and convergence, liquidity, earnings and fraud incidence are examples of risks where specific tolerance levels can be established.

Tone at the Top

Directors play a crucial role in helping the CEO set the ethical tone of the organization. Statements of corporate values, policies, response to crisis and reporting to members and regulators are all areas where credit union ethics will be on display. Since these are all areas in which the board will be directly involved, directors have a chance to reinforce the ethical values of the organization.

Contingency Planning

Crisis response, CEO succession, mergers and acquisitions and legislative lobbying are examples of events that can reshape the direction of the credit union. For the most part, these are all areas in which the board will be directly involved. Spending the time to consider how each of these could play out and developing a plan of attack is an essential role of the board.

Directors must add value and they do so through the quality of the decisions they make. We hope this discussion has been helpful in raising at least some of the issues directors can consider as they work to increase the value they provide to their credit unions.

Douglas Enns is the president of Upturn Consulting Ltd. and a former credit union CEO. He can be reached at doug.enns@managedupturn.com.